Q2 2019 Earnings Call

Please standby.

If you should require assistance during the call. Please press star zero and an operator will assist you.

At this time, it's my pleasure to turn the floor over to Chris molten head of corporate development and Investor Relations for the Eastern company, Sir the floor is yours.

Thank you.

Good morning, and thank you everyone for joining US speaking today will be Easter is president and CEO Gus flat.

Our CFO John Sullivan after that we'll open the call for questions.

Please note that some of the information you'll hear during our discussion today will consist of forward looking statements about the company's future financial performance.

And business prospects, including without limitation statements regarding revenue gross margin operating expenses other income and expense taxes and business outlook. These forward looking statements are subject to risks and uncertainties that could cause actual results or trends could differ significantly from those projected in these forward looking statements for more information regarding these risks and uncertainties. Please refer to risk factors discussed in our Form 10-Q filed last night and our most recent 10-K.

With that I'd like to turn the call over to gas for opening remarks.

Thank you, Chris and good morning to those joining us on the phone and via the web.

This morning, we will review our sales and earnings for the second quarter 2019, and touch on our progress towards our three part strategy I'll start with the quarter.

Net sales for the second quarter were $61.4 million as compared to $60.9 million for the same period in 2019.

Sales growth in the second quarter was primarily the result of the addition of several new truck mere programs.

As well as our success in capitalizing on the continued growth in class eight and medium duty truck sales.

US class eight retail sales rose, 22.5% to 135000 vehicles in the first six months of 2019 does compare to.

110000, a year earlier according to words auto.

And sales of medium duty.

Class four to seven vehicles remain similarly strong.

Strong sales to truck truck markets were partly offset by lower sales to recreational vehicle Oems consistent with our own expectations.

According to the RV wholesale shipments of motor homes were down 23% to 25000 in the first six months of 2019.

And that compares to 33000 for the same period in 2018.

Net income for the second quarter, and 2019 was $2.5 million or 40 cents per diluted share compared to $3.3 million or 52 cents per diluted share for the same period in 2018.

The decline in the second quarter net income compared to the second quarter of 2018.

Reflects our a $1.8 million, our onetime nonrecurring restructuring costs associated with the discontinuation of roadside Q a subsidiary of Belvac.

And the previously communicated consolidation of our composite panel technology facilities.

In keeping with our strategic priority to improve execution, we've adopted a lean our approach to developing enhanced fusion products at belvac.

And consequently decided to discontinue our investments in our road our Q operations.

Although this onetime charge negatively impacted our reported net earnings for the second quarter. We believe this is a prudent move that will strengthen our business results going forward.

We've also continued to make progress on our three part strategy optimizing our portfolio of businesses, improving execution and building our balance sheet.

Most notably.

Our efforts to manage our working capital and inventories in particular to more appropriate levels has helped us generate record breaking operating cash flow into second quarter of 19.

We used cash primarily to reduce our debt.

And help position eastern for future growth.

John will now help.

Provide additional detail.

On the quarter and walk us through the results. Thank you Doug.

On a consolidated basis net sales in the second quarter of 2019 increased 1% to $61.5 million as compared to $60.9 million in the second quarter of 2018.

The increase in net sales for the quarter was driven by continued strength in the industrial hardware middle product segment offset by a decline in net sales in the security products segment.

Total sales volume in the second quarter of 2019 decreased by 5%, while new products contributed 5% as compared to the second quarter of 28.

New products, including Woodmac, Mira molded tool box latching system for pickup trucks and various industrial castings for the agricultural market.

On a segment level basis.

Net sales in the industrial hardware segment increased 5% in the second quarter of 2019 as compared to the second quarter of 2018.

The sales increase in the class eight truck distribution and specialty vehicle market.

New products contributed 7%.

In the second quarter as compared to the second quarter of 2018.

New products included in class eight truck would Mount mirror, many rotary with adapter events I believe for class eight trucks and molded tool box plants in the systems for pickup trucks.

Net sales in the city.

Purity product segment decreased by 8% in the second quarter as compared to the second quarter of 28.

This decrease in net sales reflects lower demand for the company's commercial laundry products and the termination of the supply contract with the customer to manufacture.

America Tronic padlock system for cellphone tower security Axis application.

Net sales in the middle products segment increased 5% in the second quarter risk compared to the second quarter 2018 sales volume decreased by 7%, while new product sales and price increases contributed 11% during the second quarter of 2019 as compared to the second quarter 28.

New product.

Sales included various industrial castings, serving the end.

The agricultural market.

On a consolidated basis gross margin as a percent of sales in the second quarter of 2019 was down slightly to 24% as compared to 25% in the second quarter engaging.

Cost of product sold in the second quarter of 2019 increased by $2.6 million or 1% as compared to the second quarter of 28.

The increase in cost of products sold reflects the mix of products.

Increased costs due to the addition sales volume and costs incurred for the launch of the.

Class eight truck member growth.

It was not only the required components have been.

Proof for ultimate suppliers, while for more favorable pricing.

And partially offset by decreases in raw material price.

We experienced point threemillion tariffs and related costs and insurance products in the second quarter 2019, which we did not incur in the second quarter of 28.

Raw material prices have begun to decline by 20% for hot rolled steel and 13% holdings during the second quarter as compared to the second quarter of 2018.

Product development expenses increased 2.6 million, 38% in the second quarter of 2019 as compared to the second quarter 28.

The majority of the increase relates to the ongoing development of the new customer program awarded in 2018.

MSG in a expenses decreased $1 million or 11% in the second quarter of 2019 as compared to the second quarter of 2018.

Primarily related to payroll and payroll related expense.

As previously mentioned during the first quarter of 2019, we consolidated the composite panel group are relocating the combined the panel technology Division based than sold very North Carolina too.

The Canadian commercial vehicle division located in Columbia, British Columbia.

Non recurring costs incurred in the second quarter of 2019 or $2.2 million.

These costs included disposal of inventory fixed assets moving expenses.

Severance and lease termination costs.

Costs, which we finally close the operation up in April of this year.

During the second quarter of 2019, we discontinued builder.

Moving on Q operation in Bellingham, Washington.

Non recurring costs related to the discontinuation in the second quarter of 2019 or $3.7 million, which included the write off expenses inventory intangible average assets severance and lease termination costs more than nonrecurring operating expense.

These costs were partially offset by the reversal of a 2.1 million contingent liability and we established with the acquisition of Deltatech in April of 2017.

Which is no longer applicable as of June 29, 2019, resulting in a net charged earnings of 1.6.

Net income for the second quarter of 2019 decreased 2.5.

Two cents per diluted share from $3.3 million or 52 cents per diluted share for the second quarter of 28.

In the second quarter of 2019, we incurred significant onetime costs of 1.4 million net of tax associated with the restructuring.

We generated approximately $8.7 million in operating cash flow during the first six months of 2019 compared to approximately 5.6 million during the same period in 2018.

We allocated $6.3 million in cash to long term debt reduction of which $5.5 million was on an accelerated basis.

We also repaid $3.7 million from our Canadian operation in point $5 million from our Mexican operation in the first half of 2019.

We expect to repatriate, an additional $2.5 million from our Chinese operations.

In the third quarter of 2019.

Cash flows from operations, coupled with cash at the beginning of the year have been sufficient to fund, our capex that service and dividend payments over the period.

Additions to property plant and equipment were approximately $1.3 million for the first six months of 2019.

Following the end of the quarter, we paid in the additional $2.5 million on our long term debt.

At this time I would like to turn it back to go for a few closing comments.

Thank you John .

Looking ahead, we believe our businesses are positioned well to perform in the second half of this year.

We don't see any further restructuring charges and our customer backlog is expected to remain strong for 200 for the remainder of 2019.

We believe that solid demand for our products in class eight and medium duty trucks truck accessories and other core markets will continue.

And we have significant number of exciting new product launches planned in the second half of this year.

At the same time.

We continue to seek opportunities for expansion through acquisitions as you know we look for businesses with strong intrinsic economics.

True cash flow margins and return on capital.

Businesses that have a robust business model in attractive niche markets that we understand.

And have a committed and capable management team.

As mentioned earlier.

We believe that our balance sheet positions us well to pursue further acquisitions.

We remain confident that our three part strategy of optimizing our portfolio of businesses, improving execution and building our balance sheet will generate long term results for our shareholders.

With that.

I will turn to call back to Chris for questions.

Operator, do we have any questions that have come in over the telephone.

There are no questions in queue at this time, but again, ladies and gentlemen that star one on your Touchtone telephone star one to ask a question.

Damn questions in the queue at this time.

We do have some questions on the webcast.

Well go to the first one absorbing almost 10 cents a share on hair of pass throughs. A lot are you are trying to mitigate.

Why can't you pass charges to your partners will the third quarter also have this negative.

Impact on earnings.

Well the answer to that.

Basically we are passing tariff costs increases along to our customers.

We've been doing that since the very beginning when this was first started.

Well, we do have to report cost increases by segments in the 10-Q. So we do like identify those onetime new costs that we didnt have prior year.

Cost that have been.

Pretty much pass along to and we're not really seeing any negative impact in total as a result of terrorists. However.

There is.

Okay or an additional potential for another 10% tariff effective September onest.

That could have an impact on the third quarter.

We may have more difficulty passing along those increases.

It does go across a much broader spectrum of products.

But thats yet to be seen because that hasnt been enacted yet.

Okay. We have another question what is the expense for M&A.

Wouldn't that be done by inside offices already on the payroll.

Are you using outside people to look for mergers when can we expect an accretive purchase.

So we do use third parties in our M&A work.

But the success in completing any M&A transactions difficult to predict certainly difficult to predict accurately.

As I mentioned before I believe we are well positioned.

To complete the transaction.

Okay. We have another question. If you are done with write offs can we expect 60 cents in earnings.

Like the third quarter last year.

So as as you compute.

Without the onetime charge.

We'd have earnings in excess of our second quarter 2018 this year.

And.

I believe our businesses continue to remain strong our backlog is very robust.

Which puts us in a good position for the third quarter.

One more.

Question.

Long term question.

Driverless cars.

The effect on truck Windows sales.

We see a long term.

Hi impact.

I'm, assuming near Meera near term years sales.

So in in the long term or a driverless car will not need to conventional mirror in the way that we currently surprise supplied in two mostly commercial vehicle or commercial vehicle segment, I think entirely to commercial vehicles.

And.

They will have we ever need other.

Tools.

To capture data vision from around the vehicle.

Andy we are already in the business of positioning such tools and supplying such tools.

If more of cameras.

Two.

Some of our customers.

I can let me just refresh our webcast questions.

Hey, with.

Industry orders of new class eight truck orders declining severely year to date, how do you maintain such a positive outlook related to the part of your business.

That is exposed to this end market is this due to your backlog and if so what are your recent order trends related to this market look like.

So it is true that.

Myles on the road freight tonnage on the road and orders have come down significantly in the class eight truck market.

The production remains pretty robust and is expected to remain remain bus I would say into the early part of next year.

So we believe that that backlog.

We'll we'll continue to supply that backlog of of production.

Going into next year.

We believe that there.

We will not experience such growth in class eight and that we are and we are shifting our attention and leaning more heavily on some of the other markets for further growth.

So the new product launches that I mentioned earlier are an important part of our growth into into 2020.

One more refresh.

Here is that we know we have no further questions. So with that I'll turn the call back to the operator.

Thank you, Sir and ladies and gentlemen.

This does conclude today's teleconference. We appreciate your participation.

You may disconnect at this time.